As IBM Joins Flash Madness Club, Deal Chatter Turns to Fusion-io

When IBM bought small, Houston-based Texas Memory Systems for an undisclosed amount yesterday, a lot of people thought it signified the starting gun to a new round of acquisitions.

It has been only two years since the enterprise storage wars. In fact, it was two years ago this month that Dell and Hewlett-Packard bitterly battled over 3Par. HP won that fight, paying $2.4 billion for the storage concern. Dell bought Compellent instead, while IBM took out Netezza. All told, it was a $5 billion M&A bonanza that ended just as suddenly as it started.

By joining the loose collection of companies I’ve dubbed the Flash Madness Club — companies that have tossed their hats in the ring, either selling or relying on flash memory in a big way — IBM, a lot of people are speculating, will force rivals like HP, Dell and maybe Oracle to start rolling up the other flash-technology players. Nor is IBM done buying in this area.

The main target of all this is Fusion-io, the Utah-based flash-technology company that first went public last year, and which is remembered mostly for its data-center supply relationships with Facebook and Apple.

Fusion’s primary product is the ioDrive, an insert card that essentially speeds up conventional servers by feeding data to the main processor faster than the relatively poky hard drive. Fusion shares rose 7 percent on the speculation, closing yesterday at $28.23.

At that price, it trades at a market cap of about $2.6 billion. Assuming a 50 percent premium, it would, in a hypothetical deal, probably go for about $4 billion, assuming there wasn’t a crazy bidding war.

But there would be. Fusion’s primary strength is its OEM relationships. (OEM is industry lingo for Original Equipment Manufacturer.) In these relationships, Fusion sells its products like the ioDrive to such companies as HP, Dell and IBM, which then offer them as part of their own distinct servers.

The product is considered strategic enough that if one big IT player were to try and buy it, the others would put up a fight and offer competing bids to prevent Fusion from falling into the hands of a competitor. Fusion would become a much more expensive target rather quickly.

But, at the same time, the winning bidder would own an asset that would instantly lose value. If, for example, HP closed a Fusion-io acquisition, can you realistically see Dell and IBM continuing to do business with it? Future growth of Fusion’s products would have to offset that lost revenue. And given the concentration, the loss of one partner would be a big blow: 82 percent of Fusion’s revenue in its most recent quarter was made up of individual companies, each accounting for 10 percent of sales or more. A target that would get progressively more expensive in a bidding war and then lose value right away doesn’t look like a good deal.

Longer-term, there’s a lot of value in Fusion’s relationship with the end customers. Even when an OEM sells a server with Fusion’s technology inside it, it is usually Fusion and not the OEM that supports the product with software upgrades and maintenance. As more companies begin running hardware with Fusion’s technology inside them — banks and financial institutions are big fans of it, for one thing — owning Fusion would make sense for one of the big IT companies.

But here’s another thought: If Fusion is to be acquired, the thinking goes that it would have to acquired by either a traditional IT company or a dedicated storage player. HP and EMC are the ones being mentioned as possible buyers in the analyst notes today. But why not Intel?

The world’s biggest chipmaker has the cash — $13.7 billion, as of its most recent quarter — and is constantly looking for ways to expand its relationships with the hardware vendors. And since Intel already does business with all the OEMs that Fusion does, none would lose access to its technology. There are probably a lot more things to consider, but I just don’t see why Intel is not part of this conversation.

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